Looking out over Johannesburg from Braamfontein. Nelson Mandela bridge over the train station. CBD in the background.

Pretoria — The International Monetary Fund (IMF) has raised South Africa's growth forecast to 1% this year.

Speaking at the end of an IMF staff team visit to South Africa, led by Paolo Mauro, the monetary fund said there are signs of a modest improvement in the South African economy.

"Following last year's near-stagnation, there are signs that a modest improvement in the pace of economic growth is underway. The rate of real Gross Domestic Product (GDP) growth is projected at 1% in 2017," said team leader Paolo Mauro on Thursday.

The main factors underlying the pickup in economic activity this year are a resumption of solid agricultural production as the drought abates, and an increase in mining output, prompted by a moderate rebound in the prices of South Africa's commodity exports.

"The pace of recovery this year and the next is unlikely to prevent a further increase in unemployment and a continued decline in per capita incomes," he said.

The IMF had previously projected growth of 0.8%.

In the National Budget tabled in February this year, National Treasury said South Africans can expect growth of 1.3% in 2017, which is expected to improve moderately to over 2% in the medium term.

The IMF team, which was in South Africa from 3 - 16 May 2017, said they expect headline inflation to return to below 6% in the second half of 2017 and in 2018.

"Under the current stance of monetary policy, headline inflation is expected to return only somewhat below 6% in the second half of 2017 and in 2018. In line with the inflation targeting framework, it would thus be appropriate for policy rates to remain on hold, and for the central bank to stand ready to increase rates if inflation expectations were to rise," said Mauro.

In March, the Reserve Bank said its forecast for inflation has improved, with headline inflation now expected to return to within the target range of between 3% and 6% in the second quarter of 2017.

The IMF team said with limited room for stimulus through macroeconomic policies, the priority to stimulate economic growth and job creation rests with structural reforms, notably in product and service markets and in the labour market.

"Against the background of declining business and consumer confidence and rising impatience with longstanding inequalities, the authorities face the dual challenge of reigniting growth and rendering it more inclusive.

"Addressing that challenge will require early action through an initial set of policy measures to foster the entry of new firms in product and service markets, and to enhance flexibility in the labour market, as well as clear and consistent communication of the strategy to be pursued," said Mauro.

Mauro said the IMF welcomes government's recent reaffirmation of their budget objectives, as approved by Parliament.

"Implementation of the budget and of an initial set of reforms will be necessary to improve confidence in the next few months.

"In view of the rising public debt ratio, fiscal policy is appropriately focused on maintaining medium-term debt sustainability. To reduce the likelihood of a sizable increase in the cost of government borrowing, a mild but steady reduction in the fiscal deficit would be advisable during the next few years," said Mauro.

At a media briefing last month, Finance Minister Malusi Gigaba said while the executive leadership of the finance portfolio has changed, government's overall policy orientation remains the same.

"Government has been and will remain committed to a measured fiscal consolidation that stabilises the rise in public debt. The fiscal trajectory that our country is pursuing will continue. Our fiscal objectives remain unchanged," he said at the time.

Minister Gigaba was named as South Africa's new Finance Minister in March following a Cabinet reshuffle.

Reforms

Meanwhile, the IMF said reforms of public enterprises would reassure investors and the public at large, with associated benefits for public finances and economic efficiency.

Such reforms should focus on stronger governance, enhanced transparency and imposition of penalties for failure to adhere to public procurement guidelines, and quantification of public service obligations.

The team met with Minister Gigaba, Reserve Bank Governor Lesetja Kganyago; senior officials of both National Treasury and the Reserve Bank, as well as other government departments. The team also met with labour through the Congress of South African Trade Unions (Cosatu) and financial market and business representatives.

The IMF team visited Johannesburg and Durban to conduct the 2017 Article IV consultation discussions with South Africa.

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